Australian & Global Equity Market Outlook

Transcription

1 UBS Investment Research Australian & Global Equity Market Outlook David Cassidy UBS Australian Equity Strategy April 2011 This material has been prepared by UBS Securities Australia Ltd ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 49 UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

2 Equity Market Outlook - Key Views Positive on global equities. Earnings recovery is ongoing and valuations undemanding. Australia lagged global and regional equities in Earnings have disappointed. February reporting season indicates subdued conditions (ex resources) but the earnings cycle should gather momentum through this year. We believe Australian equities are undervalued in an absolute and relative sense. Risks for 2011: Chinese inflation/property cycle, the oil price, global bond yields, pace of RBA tightening. 1

3 Recent Global Stock Market Trends Back in a cyclical bull market 1800 MSCI World Index Source: Datastream 2

4 Equity Valuations Reasonably Attractive 13x-15x forward earnings is normal 30 MSCI World Index P/E x Source: I/B/E/S, Datastream 3

5 Corporate Profits Recovering 120 MSCI World Index trailing Earnings Per Share 1-year forecast Source: I/B/E/S, Datastream 4

6 The Bad News 5

7 Excessive WESTERN GOVERNMENT Debt Threatens to drive up interest rates in the medium/long-term Budget Deficit Net Government Debt FY10 as % of GDP FY10 as % of GDP Portugal -7.3% 78.9% Ireland -17.6% 55.2% Italy -5.1% 99.0% Greece -7.9% 109.5% Spain -9.3% 54.1% Germany -4.5% 58.7% Japan -9.6% 120.7% United Kingdom -10.2% 68.8% United States -11.1% 65.8% Australia -4.5% 5.4% Source: IMF 6

8 Australian Performance V Global Equities Australia has underperformed (local currency) for more than 12 months. Weak earnings outside the resource sector the chief culprit Performance of ASX200 relative to MSCI World in LC Performance of ASX200 relative to MSCI World in LC relative total return relative total return

9 Earnings Have Been Relatively Weak CY10a EPS Growth of Australia vs World Australia World Market +10.9% +40.2% Industrials +4.8% +37.9% Resources +30.3% +53.8% Weak earnings story outside resources A$ and below trend domestic activity are to blame. Consensus EPS Revision Over Last 12 Months Australia World Australia World CY11e CY11e CY12e CY12e Market -1.1% +7.4% -3.1% +1.9% Industrials -4.7% +8.3% -9.2% +1.5% Resources +9.8% +3.1% +13.0% +4.0% 8

10 Australia s Terms of Trade Boom Commodity boom creates opportunities and challenges 110 Australia Terms Of Trade Source: Datastream 9

11 A New-Found Propensity To Save? High savings and weak spending. Un-Australian? 25 15% 20 Savings Ratio Retail Sales Grow th 11% % 5 3% % Source: ABS 10

12 Australian Market 1-Year Fwd PE 12.0x PE is low versus the low inflation period post PE suggests Australian equities are approx.10% undervalued Market PE will likely continue to trade below LT median but expect some moderate re-rating. Our 5500 ASX200 target uses a 13.25x year end multiple. 25 Australian Market P/E 20-year median 20 x Source: I/B/E/S, Datastream 11

13 Australian Equities Attractive vs Govt Bonds Australia earnings yield Australian government 10-year bond yield % Source: I/B/E/S, UBS calculations 12

14 A Two- Speed Stock-Market Over Past Year Resources have led over the past year. Performance of Australian Sectors 3 month 12 month MARKET +0.3% +0.8% Mining & Metals -2.8% +11.9% Energy +5.5% +8.4% Materials ex Mining & Metals +2.5% +6.6% Property Trusts +3.5% +5.6% Gaming -0.4% +3.8% Consumer Staples +0.1% +1.6% Utilities -3.5% +1.1% Telcos +2.6% -1.3% General Industrials -0.6% -3.1% Health Care -3.5% -4.7% Banks +2.9% -5.3% Insurance -1.3% -6.2% Discretionary Retail -0.5% -10.8% Diversified Financials -1.9% -11.6% Media -0.5% -14.0% Source: IRESS, Datastream 13

15 Sector Valuation and Earnings Estimates P/Es still look moderate in most areas. Upside risk to resources at spot commodities. Still some near term downside to industrials (soft economy & A$) P/E EPS Growth 1yr fwd FY10E FY11E FY12E Market % +15.0% +12.4% Market ex Resources % +5.6% +11.0% Resources % +41.7% +15.3% of which Mining & Metals % +46.6% +13.0% & Energy % +14.5% +31.7% Financials % +7.5% +9.3% of which Banks % +8.6% +6.7% & Real Estate % +6.5% +3.8% Industrials-ex-financials % +2.5% +14.1% Source: UBS, I/B/E/S 14

16 Resource Sector Relative Performance Sector has outperformed over the past year. Small has beaten large. Still believe secular uptrend is intact. 300 Performance of Australian Resources relative to Market Performance of Small Resources relative to Large Resources Source: IRESS 15

17 Resource Valuations BHP Billiton/Rio Tinto preferred. Mid and small caps have come back to more reasonable valuations on NPV but be selective. 30 Australian Mining & Metals P/E x Source: UBS estimates 16

18 Is This Trend Sustainable? Iron Ore and Met Coal? Housing cycle is the key for steel production. We expect slower but still positive rates of growth. 70,000 China Steel Production 60,000 50,000 40,000 30,000 20,000 10,

19 Resources: The Big Structural Trend Still In Place China urbanisation & re-urbanisation should continue to see commodity intensive growth. Public housing initiative to support steel production in 2011/2012 We expect Chinese steel intensity to peak around China urbanisation ratio Japan urbanisation ratio % Source: IMF, UBS 18

20 Commodity Prices Due For A Pullback? Metals have run hard and are likely topping. Still structurally positive bulks but also likely peaking. Oil price risk premium $15 plus but will be stubborn Copper price Oil price Iron Ore price Thermal Coal price Source: Datastream, Bloomberg 19

21 Bank Valuation Absolute Looks Quite Attractive 1-yr fwd PE consensus PE of 10.5x & 6.5% dividend yield. LTA PE = 12.3x. We target 12x Lower growth should provide scope to keep div payouts high 18 Banks 1-year forward P/E x Source: I/B/E/S, UBS 20

22 Australian Credit Growth How fast can banks grow their balance sheets. In line with nominal GDP or below? No reason for business to keep de-leveraging in our view Credit Growth - TOTAL Aust Nominal GDP 20 %y/y Source: Datastream 21

23 Australian REIT Valuation - P/E 1 Year Forward Looks about fair in an absolute sense. A little expensive versus the broader market 20 AU REIT sector P/E 20-year median x Source: UBS estimates 22

24 Statement Of Risks Forecasting earnings and corporate financial behaviour is difficult because it is affected by a wide range of economic, financial, accounting and regulatory trends, as well as changes in tax policy. Equity market returns are influenced by corporate earnings, interest rates, and investor demand risk premiums. The outlook for any and all of these variables is subject to change. 23

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